India at the cusp of a digital revolution

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Mumbai, 22 May 2013 – India is at the cusp of a digital revolution with the rapidly increasing ‘netizens’ and substantially high investments in the e-commerce sector in India. According to EY’s report titled ‘Rebirth of e-commerce in India’, declining broadband subscription prices, aided by the launch of 3G services, have been driving this trend. The report focuses on the various sub-segments of the e-Commerce market, factors driving growth across these segments and the challenges faced by stakeholders. .

Milan Sheth, Partner & Technology Industry Leader, EY India and author of the report says, “The trend of online shopping is set to see greater heights in coming years, not just because of India’s rising internet population, but also due to changes in the supporting ecosystem. Given these developments, venture capitalists and private equity players are taking keen interest in the sector. 2011 saw a total investment of US$305 which amply substantiates the growth trajectory of the industry.”

Sub-segments of e-Commerce sector

The online retail segment has evolved and grown significantly over the past few years. Changing lifestyles of the country’s urban population have led many people relying on the internet for their shopping needs.

“Cash-on-delivery has been one of the key growth drivers and is touted to have accounted for 50% to 80% of online retail sales. Players have adopted new business models including stock-and-sell, consignment and group buying; however, concerns surrounding inventory management, location of warehouses and in-house logistics capabilities are posing teething issues” says Mr. Sheth.

To improve margins, online travel players are diversifying their offerings to include hotel reservations, along with the regular ticketing services says the report. “To make the most of this move, players will need to develop new skill sets to manage challenges associated with a diverse supplier base, technological constraints, customer experience, authenticity of information and grievance re-dressal” adds Mr. Sheth.

Classifieds, the earliest entrant in the e-Commerce space in India, is undergoing a shift in operational model from vertical to horizontal offering. Players now offer a gamut of services ranging from buying/selling cars to finding domestic help/babysitter states the report.

Investments in e-Commerce

India’s e-Commerce sector attracted US$305 million (in 37 deals) from January 2011 to November 2011 (454% more than US$55 million raised from 12 deals in 2010). The bulk of the funds raised by players was used to expand market presence, build logistics and supply chain capabilities, and enhance technology platforms states the report.

Says Mr. Sheth, “Several VCs are investing in the e-Commerce space because they feel this is the right time to invest in the space and do not want to miss out on its current wave of popularity. The sector would continue to receive funding from VC and PE players despite concerns relating to a valuation bubble. Early stage - focused PE players would invest a major part of their funds (40%) in internet-based companies by 2014–15”

Key challenges

The report states several challenges that the industry is currently faced with and is impacted by. Some of the key challenges are:

Cloud surrounding e-Commerce laws in India

Low entry barriers leading to reduced competitive advantages

Rapidly changing business models

Restriction to urban areas, with the bulk of the business being restricted to cities

Shortage of manpower

Customer loyalty

Supporting ecosystem and future

To ensure that e-Commerce maintains the steam that it has gained in recent years, Government needs to focus on the regulatory front. Unlike many other countries, India still does not have dedicated e-Commerce laws.

“e-Commerce is set to continue on its growth path on the back of the stabilization of the ecosystem and interest demonstrated by VC players, combined with support from the Government of India”, concludes Mr. Sheth.

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EY refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.